Author: Payal Shah, CME Group
AT A GLANCE
Institutional interest has helped fuel an increase in spot market trading as prices reach record levels
· CME Group’s launch of Ether futures gives institutional traders a convenient way to get exposure to price movements
The interest in Ethereum technology has never been higher. Ethereum is the second-largest public Blockchain network by both market capitalization and daily trading volume. It has already undergone remarkable development in its young history and continues to grow steadily. In 2020, an average of $231 million in ether was traded daily on spot exchanges. To start 2021, that number jumped to $2.7 billion.
The interest has in part come from the acceleration of Decentralized Finance (Defi), a concept that focuses on blockchains and smart contracts rather than traditional financial intermediaries. It has also come from Ethereum layer 2 solutions – technology built on top of Ethereum that is highly scalable and efficient — and sizeable developments with stablecoins, which are mostly anchored on the Ethereum network.
As such, the excitement and interest around Ether shows signs of growing acceptance and an appreciation of decentralization. Let’s look at three key reasons for the growing interest in this rapidly changing market:
To start, there is global adoption and growing interest in blockchain technology. According to a report from Deloitte, 40% of surveyed companies planned to spend at least $5 million on blockchain projects in 2020, and 86% of U.S. companies surveyed built or are in the process of building blockchain teams. 55% of those surveyed said Blockchain was a top five strategic priority.
This acceptance and investment is a broad sign that blockchain technology has become more trusted among those looking to use it to improve business processes or use it as a method for transactions. Ethereum has emerged as the most established cryptocurrency for these purposes due to its DeFi and scalability credentials.
In addition, 2020 ushered in improvements in crypto market structure, thanks to growing involvement from spot exchanges and custodian projects, as well as enhanced security and regulation to the spot crypto market.
Second, more institutions are warming up to the idea of crypto, which increases demand. In the current macro environment, some may view crypto as a hedge against potential future inflation.
Looking to futures markets, institutional demand has certainly helped drive bitcoin markets recently. Average daily open interest in CME Group Bitcoin futures rose 233% in Q4 2020 over the same period in 2019. Additionally, the number of large open interest holders in Bitcoin futures rose to its highest level ever in December with 110 large traders holding more than 25 futures contracts (125 bitcoin equivalent).
A Regulated Futures Market
Lastly, institutions that include crypto in their portfolios need a trusted venue to manage risk with price transparency and liquidity. The launch of the CME Ether futures contract provides institutional investors a regulated market in which to get exposure to price movements without having to handle the digital asset, or deal with concerns about wallets, custodians, insurance or other barriers to entry.
The Ether contract enables participants to invest in and access the cryptocurrency markets, while also managing any crypto-related risks.
The introduction of listed Ether futures will help to create a forward curve so Ethereum market participants can better manage price risk. In the days ahead, we may see traditional financial institutions such as major hedge funds and asset managers to enter the ether market along with funds that are crypto native. Further the Ether futures contract will be useful to those hedging their digital exposure accumulated through transacting in the spot market, through mining or lending activities or from fundraising for a project.
With ether demand growing, the futures contract performance will be something to watch in the months ahead. Whether viewed as a valuable blockchain technology or a store of value, Ethereum has carved out a large and important place in the market for crypto.
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